Answer to Question #226536 in Accounting for fanscil

Question

A company decided to install new equipment.

present breakeven point = 6500units and $350,000

new breakeven point = 6000units and $300,000

margin of safety (based on present BE) = 1500units and $85,000 and 20%

margin of safety (based on new BE) = 1800units and $90,000 and 22%

State whether the company should install new equipment and explain the circumstances

(I) break-even point; and

(ii) Safety margin,

Answer 1

(i) A decrease in the break-even point is a criterion for the successful operation of the enterprise; an increase in the break-even point is evidence of a deterioration in its financial condition.

(ii)The increase in the "margin of safety" is the degree of remoteness of the real state of the enterprise from the break-even point.

An increase in both indicators indicates an increase in profitability and an increase in the efficiency of the company's activities, therefore, the desire to install new equipment.